MNI INTERVIEW: EU Needs 'Credible Threat' Against China

Europe must present a “credible threat” that it will introduce compensatory tariffs in response to Chinese industrial subsidies, but Chinese investment in Europe should be welcomed, an advisor to German Economy Minister Katharina Reiche told MNI.

It is important to give Beijing due warning before acting, said Stefan Kolev, a member of the Federal Ministry for the Economy and Energy’s Scientific Advisory Board for Economic Policy since last September, adding that Europe’s market remains important to China and that global trade flows need to be sustained.

“The alternative - just introducing tariffs without consulting China - would almost certainly lead to retaliatory measures and further spirals. Better to choose the least painful option for both parties,” Kolev said, speaking as Europe considers taking action against a flood of cheap Chinese imports.

The head of Berlin’s Ludwig Erhard Forum for Economics was upbeat at the prospect of Chinese firms taking greater stakes in German and European companies, particularly where this provides opportunities for technological transfer.

“It ultimately doesn’t help with the imbalances in what some describe as China’s trade war, which is what we are talking about,” he said. “At the same time, we need to preserve open markets globally. Open economies such as Germany’s - but also much poorer ones - would have gigantic difficulties if the disintegration we’ve already seen continues to advance.”

PENSION REFORM

Germany’s own economic reforms face significant barriers, Kolev said. Plans put forward this week by a special commission to reform the pension system should have a “meaningful” impact, though it will take “courage” for the CDU-SPD government of Chancellor Friedrich Merz to see them through. (See MNI INTERVIEW: ECB Rates Already Too High - Bofinger)

Kolev was optimistic about proposed changes to the healthcare system, but questions remain about the timing of a planned cut in corporation tax, and the extent to which energy subsidies will be reduced.

“If the aim is to achieve higher growth over the next years, then it’s clear that the focus has to be on increasing private investment. Whether that means foreign companies, big companies, small companies, doesn’t matter to me - we just need to create the framework conditions that will incentivise them to invest, and not just for one or two years, but over the long term,” Kolev said, calling for Germany to learn from progress made by central and eastern European economies.

The prospects for an increase in growth from funds to boost defence and infrastructure and climate-neutral projects have improved, Kolev said, despite evidence that a significant proportion of the money has so far been spent on regular budgetary items.

“I’m still suspicious, but my hope is that there is now a real chance that things will get better from now on; that medium-term investments - not even long-term - will finally be prioritised over consumption,” he said.

INFLATION RISK

“That’s also important if we want to bring people back to the political centre. We've had two huge budgets, 2025 and 2026, and public debt is running for the next years at about 200 billion euro per year, but I don’t see much either on the asset or the growth side produced by that huge debt; at least not to the degree which would convince me that the fiscal burden the debt entails for the future is justified.”

The worry is that markets could demand a higher coupon on sovereign debt, while adding to inflation risks, he said. (See MNI INTERVIEW: Germany Heads For Debt Downgrade-Watchdog Chief)

“My concern is that experiments in Berlin could have serious spillover effects for other eurozone countries,” he said. “I am worried about inflation, because the fiscal situation of so many countries is impairing the ECB’s ability to react to higher inflation - despite last week’s courageous hike.”